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Delinquency rate dips for MFIs as RBI steps bear fruit

Delinquency rate dips for MFIs as RBI steps bear fruit

18 Oct 2013 Financial Express

Edition: Page 08

Microfinance institutions (MFIs) have seen a steady drop in
delinquencies over the past one year as they turned more selective
in their lending.

Microfinance institutions (MFIs) have seen a steady drop in
delinquencies over the past one year as they turned more selective in
their lending. The systemic delinquency rate dropped to 0.74% in
August 2013 compared to 1.1% in April and 1.6% in mid-2012, according
to a report by credit bureau Equifax Credit Information Services.

In absolute terms, the numbers of accounts that are more than 30 days
outstanding dropped to 1,68,865 in August 2013 from 2,98,472 in
mid-2012, with most of this drop coming from states other than Andhra
Pradesh. MFIs disburse short-term unsecured loans, typically with a
duration of one year, which are expected to be repaid in weekly or
monthly instalments. The-se loans have no collateral, so the expected
loss in case of delinquency is the entire amo-unt of unpaid principal.
“The decline in delinquency rates is great news for Indian
microfinance and banking industry, and is an affirmation that the use
of the credit bureau in MFI lending and related tools are adding
visibility and value to the MFI market,” said Equifax MD & CEO
Sanjay Patel. Equifax's database captures about 35 million borrowers
and is updated monthly by more than 125 MFIs.

Microfinance companies have been able to bring down delinquencies
down after the Andhra Pradesh crisis in 2010 through strict norms for
geographic concentrations, proc-ess improvements through usage of
technology and trai-ning and adherence to the guidelines laid down by
RBI), said another report by analy-sts at Antique Stock Broking.

Tougher guidelines from the RBI have also meant that MFIs need to be
more selective in their lending. Bandhan Financial Services, one of
India’s largest MFIs, said they have seen a 1-2% loan rejection rate.
“Out of about 4 lakh people who apply for loans in a month, we reject
about 80 people in a geographic area based on the data we get from
credit bureaus,” said Chandra Shekhar Ghosh, CMD of Bandhan Financial
Services. Bandhan’s outstanding loans are currently stand at R4,500
crore and its collection rate is 99.5%.

The improvement in asset quality and lending standards have also
meant that banks are now more open to lending to MFIs. “MFIs are
getting more funding from banks and the equity market, though they are
being more cautious and selective,” said Alop Prasad, CEO, Micro
Finance Institution Network, the industry body for MFIs.

Following the microfinance crisis in Andhra Pradesh, the RBI had set
up a committee headed by YH Malegam to study the issues in
microfinance and suggest a regulatory framework for the industry. Most
recommendations of the committee were accepted by the RBI.

Under the new guidelines, MFIs cannot lend amounts more than R50,000
and more than 70% the companies’ loan book must be towards income
generating activities.